ECB Preview: Lagarde May Trigger A “Buy The Dip” Opportunity By Trying To Talk Down The Euro

Missing the target for over two years – and moving further away from it– cannot be called a success. The European Central Bank has only one job, keeping inflation “at, or close to 2%” and the current level of -0.3% is undoubtedly an issue.

The COVID-19 pandemic is the main culprit, causing harsh economic pain and lowering demand. A change in German VAT also contributed to pushing the Consumer Price Index lower, but even when that effect fades away – inflation remains depressed. Core CPI, at a positive 0.2% is also dismal.

Source: FXStreet

Another issue is the high exchange rate of the euro, which pushes prices of imported prices lower, and makes European exports less attractive. EUR/USD shot higher amid falling demand for the safe-haven dollar which is the result of the decisive US elections and more importantly, the breakthroughs in coronavirus vaccines. Europe’s harsh winter covid wave failed to push the common currency lower.

Christine Lagarde, President of the ECB, expressed some discontent with the high exchange rate of the euro and may take another step in the upcoming meeting. Back in December, the bank announced the expansion of its Pandemic Emergency Purchase Program by around €500 billion.

Contrary to the pre-coronavirus era, printing euros benefit the currency. Instead of seeing the creation of new funds as devaluing existing ones, investors observe lowering borrowing costs for governments, which can boost expenditure and support the economies of the currency bloc.

Rate cut? Not so fast

The only tool that the Frankfurt-based institution can deploy to hit the euro is cutting its deposit rate – which is already at -0.50%, in deep-freeze territory, like the Pfizer/BioNTech vaccine’s storage requirements. Further punishing banks for parking money with the bank would be hard. It is also essential to remember that members from Germany and other northern members are not keen on looser monetary policy.

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